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Foolish Forecast: Yum! Brands Reheated

Views you can use to get clues on tomorrow's news.

After market close tomorrow, Yum! Brands(NYSE:YUM), operator of KFC, Taco Bell, and Pizza Hut, among others, will announce second-quarter earnings. The earnings call is scheduled for the following morning. Will the company report results as impressive as the first quarter's? Should investors be interested? Read on.

What analysts say:

Buy, sell, or waffle? Of the 18 analysts who follow Yum! Brands, seven recommend buying, one would rather sell, and the rest prefer to wait and see.

Revenues. Expectations call for a modest 1.6% increase over last year's revenues, to $2.19 billion.

Earnings. The estimate is $0.62 per share, a 5% increase year over year.

What management says:In last quarter's earnings release, Chairman and CEO David Novak said:

Our entire portfolio contributed to the strong worldwide first-quarter operating-profit growth of 12% and EPS growth of 18%. This performance is particularly impressive given the immense amount of global news coverage about avian flu. As a result, we are encouraged by our ability to continue to overcome consumer perception issues. Clearly, our customers are getting the message that fully cooked chicken is safe to eat. Finally, we are pleased with the sales recovery of our mainland China business, reporting system-sales growth of 35% in local currency for March.

Considering that Yum! opened 267 KFC locations in China between the first quarters of 2005 and 2006, and expects to open more going forward, declining concern about avian flu is good news for the company.

Novak continued: "[W]e have raised our full-year 2006 EPS estimate to at least $2.81, or 11% growth. This would make the fifth straight year that we deliver against our annual target of at least 10% EPS growth." That's an impressive track record by any measure.

What management does:Unlike several other companies I've recently reviewed, Yum! is holding its margins steady on a rolling-12-month basis. It has even improved gross margins somewhat, possibly due to lower chicken prices stemming from avian flu fears. In the last quarterly earnings release, the company provided all three main financial statements (including cash flow, something often skipped in earnings releases) and a breakdown by division -- U.S. domestic, international, and China. That's most Foolish, and I hope more companies will emulate Yum!'s behavior here.

* Trailing-12-month data for quarter ended in month indicated.** Based on gross profit defined as sales without franchise revenue less cost of food.*** Year-over-year comparison for quarter ended in month indicated.All data from relevant company 10-K and 10-Q filings.

One Fool says:The company has stated that its two recent ventures into corporate sponsorship of sporting events ("presenting" sponsor of the Kentucky Derby and sponsoring a driver for the Indy 500) were aimed at increasing the number of shares held by individual investors. The goal is to move that number from about 20% of shares outstanding to about 30%. (Institutional investors hold the rest.) Management feels that individual investors are more stable and hold for longer periods.

I find that interesting, because when most companies sponsor an event, they do it primarily for the advertising. Of course, Yum! Brands got that as well. Most people know about KFC and Taco Bell, and many might even have known that they were formerly owned by PepsiCo(NYSE:PEP). But apparently management at Yum! Brands, created when Pepsi divested the fast-food chains, feels its company is not as well-known to investors.

For investors seeking some international exposure, Yum! Brands could prove interesting given its rapid growth in China. Look for the earnings report and do some due diligence to see whether this one is worth your while.

Competitors:

Burger King(NYSE:BKC)

McDonald's(NYSE:MCD)

Wendy's(NYSE:WEN)

Several private chains, including Taco Time, Pizza Haven, and Chick-Fil-A